Tax Administration: IRS' Return Selection Process

Pursuant to a congressional request, GAO reviewed how effectively the
Internal Revenue Service (IRS) selects individual income tax returns for
audit, focusing on: (1) the extent to which IRS district offices have
used various sources to select these individual returns for audit; and
(2) comparing the results of audits selected using these sources in
terms of the rate at which audits recommended no-change to the tax
reported, amount of additional taxes recommended per return audited, and
rates at which IRS assessed and collected such recommended taxes after
the audit.

GAO noted that: (1) of the 1.1 million closed books and records audits
of returns received in 1992, 1993, and 1994, GAO's analysis showed that
IRS selected 59 percent of the returns using its discrimnant function
(DIF) source; (2) the other 41 percent were selected using non-DIF
sources; (3) when GAO compared the results from DIF and non-DIF audits
of returns received in 1992, 1993, and 1994, the non-DIF audits
generally resulted in lower no-change rates and higher recommended
additional taxes than DIF audits; (4) these results are consistent with
IRS' policy to use non-DIF sources if the audit potential appears to be
higher than it would be from a DIF audit; (5) in contrast, GAO estimated
that IRS collected a greater proportion of the additional taxes
recommended in DIF audits than for non-DIF audits, based on a sample of
returns received in 1992; (6) an estimated 57 percent of the recommended
additional taxes were collected for DIF audits versus 35 percent for
non-DIF; (7) several IRS operations affect collections and GAO was
unable to determine from IRS' data which of these caused the non-DIF
collection rate to be lower; (8) caution is needed if one uses the three
results analyzed to compare the effectiveness of DIF and non-DIF
sources; (9) the no-change rate, the recommended additional tax amounts,
and the collection rate on these recommended amounts do not present a
complete picture of audit effectiveness; (10) for example, data are not
readily available on how audits affect voluntary compliance and taxpayer
burden; and (11) nor are data readily available on how other factors,
such as the quality of the audits, affected the results across the
selection sources.